What's Fair About Fair Market Price?

By Laura Markee, CFA, ASA, Markee Valuations September 2020 Bar Bulletin September 1, 2020

Imagine a circumstance in which your customers are divorcing, and the spouse is an effective psychologist. For the sake of the example, presume even more that her practice is so effective that she earns over $500,000 every year in her practice, much greater than the industry standard of $250,000 for solo professional psychologists with her level of education.

In a divorce in Washington State, lawyers should be aware of when and how Washington's "fair value" requirement might come into play in identifying the value of an independently held company. In particular scenarios, fair market value (FMV) and fair worth analyses will lead to significantly different conclusions and lawyers who are unaware of the application of reasonable worth may advise their clients to accept a value for their business interest far listed below what might be granted.

Definition of Value

In business appraisal, appraisers are usually engaged to figure out value under the fair market price requirement. Fair market price (FMV) is defined by the American Society of Appraisers as:

"The rate, expressed in terms of money equivalents, at which residential or commercial property would change hands in between a theoretical prepared and able purchaser and a theoretical willing and able seller, acting at arm's length in an open and unlimited market, when neither is under compulsion to buy or sell and when both have affordable understanding of the relevant facts."

Although FMV is the standard of value in a marital dissolution context in lots of states, in Washington, the reasonable value requirement is utilized. Unlike FMV, there is no typically accepted definition for fair worth. In the AICPA's published SSVS,1 it is kept in mind that, "for state legal matters only, some states have laws that utilize the term fair value in shareholder and partner matters. For state legal matters only, therefore, the term may be specified by statute or case law in the specific jurisdiction."

In dissenter's rights actions in Washington State, courts figure out the "fair value" of the shareholder's interest, as opposed to the "reasonable market price."2 In Washington, for the purpose of a shareholder injustice fit, it is concurred that "fair worth" does not consist of a discount rate for minority status.3

"Fair value" is not associated with "fair market price."4 While FMV is pertinent to identifying fair value, the circumstances of a particular case are necessary to identifying fair worth.

If the parties are getting separated and they own one hundred percent of a rewarding business, the application of reasonable value versus FMV will usually not come into play because the FMV of a 100 percent ownership interest in a profitable business is frequently equivalent to fair value.

However, in specific cases, recognition and recognition of the fair worth standard is crucial to getting to the proper worth conclusion for the customer.

Example # 1: The Professional Practice

Let's go back to the example of a better half's flourishing psychology practice. Fair market price (FMV) and fair value analyses will result in substantially different conclusions in this case.

In determining FMV, a lot of would agree that the "property approach" to evaluation should be used, which designates value to the minus liabilities. In this engagement, concrete properties would consist of money, accounts receivable, and likely computers, desks, and furniture, net of liabilities. However, the value would not consist of any intangible worth, or "goodwill," for the easy fact that her patients and files are confidential. It would violate HIPAA5 and her ethical standards to divulge this information